• PRU 3.14 PRU 3.14 Qualifying Holdings outside the financial sector

    • PRU 3.14.1

      (1) Where an Authorised Person has a Qualifying Holding in an Undertaking which is not one of the following:
      (a) an Undertaking that is a Relevant Entity; or
      (b) an Undertaking that carries on activities that are:
      (i) a direct extension of banking;
      (ii) ancillary to banking; or
      (iii) leasing, factoring, the management of unit trusts, the management of data processing services or any other similar activity,

      and the amount of the holding exceeds 15% of the eligible total Tier 1 of the Authorised Person, the Authorised Person must comply with the requirements in (3).

      (2) The total amount of the Qualifying Holdings of an Authorised Person in those Undertakings referred to in (1) that exceeds 60% of its Tier 1 are subject to the requirements in (3).
      (3) An Authorised Person must apply a risk weight of 1000% to the greater of the total amount of Qualifying Holdings referred to in (1) and that in (2).
      (4) As an alternative to applying a 1000% risk weight to the amounts in excess of the limits specified in (1) or (2), an Authorised Person may deduct those amounts from CET1 Capital.
      (5) Shares of Undertakings to which (1) or (2) do not apply must not be included in calculating the eligible capital limits specified in (1) where any of the following conditions are met:
      (a) those Shares are held temporarily during a financial reconstruction or rescue operation;
      (b) the holding of the Shares is an Underwriting position held for five working days or less; or
      (c) those Shares are held in the name of the Authorised Person on behalf of others.

    • PRU 3.14.2

      AT1 Capital consists of the sum of the following capital elements:

      (a) capital instruments which meet the eligibility criteria laid down in Rule 3.14.3; and
      (b) the Share premium accounts related to the instruments referred to in (a).

    • PRU 3.14.3

      (1) For the purposes of Rule 3.14.2(a), a capital instrument is eligible for inclusion in AT1 Capital where all of the following conditions are met:
      (a) the instruments are issued and paid up;
      (b) the instruments are not purchased by any of the following:
      (i) the Authorised Person or its Subsidiaries; or
      (ii) an Undertaking in which the Authorised Person has participation in the form of ownership, direct or by way of control, of 20% or more of the voting rights or capital of that Undertaking;
      (c) the purchase of the instruments is not funded directly or indirectly by the Authorised Person;
      (d) the instruments rank below T2 Capital instruments in the event of the insolvency of the Authorised Person;
      (e) the instruments are not secured, or guaranteed by any of the following:
      (i) the Authorised Person or its Subsidiaries;
      (ii) any Parent of the Authorised Person or their Subsidiaries;
      (iii) any member of its Financial Group in accordance with Chapter 8; or
      (iv) any Undertaking that has Close Links with entities referred to in (i) to (iii);
      (f) the instruments are not subject to any arrangement, contractual or otherwise that enhances the seniority of the claim under the instruments in insolvency or liquidation;
      (g) the instruments are perpetual and the provisions governing them include no incentive for the Authorised Person to redeem them;
      (h) where the provisions governing the instruments include one or more call Options, the option to call may be exercised at the sole discretion of the Issuer;
      (i) the instruments may be called, redeemed or repurchased only where the Authorised Person has notified the Regulator of its intention to call, redeem or repurchase the instruments in writing and well in advance, and not before five years after the date of issuance of the respective instruments;
      (j) the provisions governing the instruments do not indicate explicitly or implicitly that the instruments would or might be called, redeemed or repurchased and the Authorised Person does not otherwise provide such an indication;
      (k) the Authorised Person does not indicate explicitly or implicitly that the Regulator would not object to a plan to call, redeem or repurchase the instruments;
      (l) distributions under the instruments meet the following conditions:
      (i) they are paid out of distributable items;
      (ii) the level of distributions made on the instruments will not be modified based on the credit standing of the Authorised Person or any of its Parents or any entities in its Financial Group;
      (iii) the provisions governing the instruments give the Authorised Person full discretion at all times to cancel the distributions on the instruments for an unlimited period and on a non-cumulative basis, and the Authorised Person may use such cancelled payments without restriction to meet its obligations as they fall due;
      (iv) cancellation of distributions does not constitute an event of default of the Authorised Person; and
      (v) the cancellation of distributions imposes no restrictions on the Authorised Person;
      (m) the instruments do not contribute to a determination that the liabilities of an Authorised Person exceed its assets, where such a determination constitutes a test of insolvency under the Insolvency Regulations;
      (n) the provisions governing the instruments require the principal amount of the instruments to be written down, or the instruments to be converted to CET1 Capital instruments, upon the occurrence of a trigger event;
      (o) the provisions governing the instruments include no feature that could hinder the recapitalisation of the Authorised Person; and
      (p) where the instruments are not issued directly by the Authorised Person or by an operating entity within the Financial Group to which the Authorised Person belongs, or by the Parent of the Authorised Person, the proceeds are immediately available without limitation in a form that satisfies the conditions laid down in this Rule to any of the following:
      (i) the Authorised Person;
      (ii) an operating entity within the Financial Group to which the Authorised Person belongs; or
      (iii) any Parent of the Authorised Person.
      (2) For the purposes of (1)(l)(v) and (1)(o), the provisions governing AT1 Capital instruments must not include the following:
      (a) a requirement for distributions on the instruments to be made in the event of a distribution being made on an instrument issued by the Authorised Person that ranks to the same degree as, or more junior than, an AT1 Capital instrument;
      (b) a requirement for the payment of distributions on CET1, AT1 or T2 Capital instruments to be cancelled in the event that distributions are not made on those AT1 Capital instruments; or
      (c) an obligation to substitute the payment of interest or dividend by a payment in any other form.
      (3) For the purposes of (1)(n), the following provisions apply to AT1 Capital instruments:
      (a) a trigger event occurs when the CET1 Capital of the Authorised Person falls below either of the following:
      (i) 66.25% of its Capital Requirement; or
      (ii) a level higher than 66.25%, where determined by the Authorised Person and specified in the provisions governing the instrument;
      (b) where the provisions governing the instruments require them to be converted into CET1 Capital instruments upon the occurrence of a trigger event, those provisions must specify either of the following:
      (i) the rate of such conversion and a limit on the permitted amount of conversion; or
      (ii) a range within which the instruments will convert into CET1 Capital instruments;
      (c) where the provisions governing the instruments require their principal amount to be written down upon the occurrence of a trigger event, the write down must reduce all the following:
      (i) the claim of the holder of the instrument in the liquidation of the Authorised Person;
      (ii) the amount required to be paid in the event of the call of the instrument; and
      (iii) the distributions made on the instrument.
      (4) The following must apply where, in the case of an AT1 Capital instrument, the conditions laid down in this Rule cease to be met:
      (a) that instrument must cease to qualify as an AT1 Capital instrument; and
      (b) the part of the Share premium accounts that relates to that instrument must cease to qualify as an AT1 Capital element.

    • AT1 regulatory deductions

      • PRU 3.14.4

        Subject to the following Rules in this Section, an Authorised Person must deduct the following from the calculation of its AT1 Capital:

        (a) direct and indirect holdings by an Authorised Person of own AT1 Capital instruments including instruments under which an Authorised Person is under an actual or contingent obligation to effect a purchase by virtue of an existing contractual obligation;
        (b) holdings of the AT1 Capital instruments of Relevant Entities where those entities have a reciprocal cross holding with the Authorised Person which have the effect of artificially inflating the Capital Resources of the Authorised Person;
        (c) the amount determined in accordance with Rule 3.14.8 of direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person does not have a significant investment in those entities;
        (d) direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities where the Authorised Person has a significant investment in those entities, excluding Underwriting positions held for five working days or fewer; and
        (e) the amounts required to be deducted from T2 Capital pursuant to Rule 3.15.4 that exceed the T2 Capital of the Authorised Person.

    • Deductions relating to holdings of own AT1 Capital instruments

      • PRU 3.14.5

        For the purposes of Rule 3.14.4(a), an Authorised Person must calculate holdings of its own AT1 Capital instruments on the basis of gross long positions subject to the following exceptions:

        (a) an Authorised Person must calculate the amount of holdings of own AT1 Capital instruments in the Trading Book on the basis of the net long position provided the long and short positions are in the same underlying Exposure and the short positions involve no Counterparty Credit Risk;
        (b) an Authorised Person must determine the amount to be deducted for indirect holdings in the Trading Book of own AT1 Capital instruments that take the form of holdings of index Securities by calculating the underlying Exposure to own AT1 Capital instruments in the indices; and
        (c) an Authorised Person must net gross long positions in own AT1 Capital instruments in the Trading Book resulting from holdings of index Securities may be netted by the Authorised Person against short positions in own AT1 instruments resulting from short positions in the underlying indices, including where those short positions involve Counterparty Credit Risk.

    • Deductions relating to AT1 Capital instruments in Relevant Entities

      • PRU 3.14.6

        For the purposes of Rule 3.14.4(b), (c) and (d), the amount of holdings of AT1 Capital instruments of Relevant Entities to be deducted, must be calculated, subject to 3.14.7, on the basis of the gross long positions.

      • PRU 3.14.7

        For the purposes of Rule 3.14.4(c) and (d), an Authorised Person must make the deductions in accordance with the following:

        (a) the holdings in the Trading Book of the capital instruments of Relevant Entities must be calculated on the basis of the net long position in the same underlying Exposure provided the maturity of the short position matches the maturity of the long position or has a residual maturity of at least one year; and
        (b) the amount to be deducted for indirect holdings in the Trading Book of the capital instruments of Relevant Entities that take the form of holdings of index Securities must be determined by calculating the underlying Exposure to the capital instruments of the Relevant Entities in the indices.

    • AT1 deductions relating to significant investment in a Relevant Entity

      • PRU 3.14.8

        (1) For the purposes of Rule 3.14.4(c), an Authorised Person must calculate the applicable amount to be deducted by multiplying the amount referred to in (a) by the factor derived from the calculation referred to in (b):
        (a) the amount referred to in Rule 3.13.16(1)(a);
        (b) the amount of direct and indirect holdings by the Authorised Person of the AT1 Capital instruments of Relevant Entities divided by the aggregate amount of all direct and indirect holdings by the Authorised Person of the CET1, AT1 and T2 Capital instruments of those Relevant Entities.
        (2) An Authorised Person must exclude Underwriting positions held for five working days or fewer from the amount referred to in Rule 3.13.16(1)(a) and from the calculation of the factor referred to in (1)(b).
        (3) An Authorised Person must determine the portion of holdings of AT1 Capital instruments that is to be deducted pursuant to (1) by dividing the amount specified in (a) by the amount specified in (b):
        (a) the amount of holdings required to be deducted pursuant to (1)(a);
        (b) the aggregate amount of direct and indirect holdings by the Authorised Person of all the capital instruments of Relevant Entities in which the Authorised Person does not have a significant investment.